THE 2010 FINANCIAL SERVICES SURVEY - WHAT DOES THE YEAR AHEAD
HOLD FOR THE SECTOR?

By Natasha Lee

As part of our continued commitment to the financial
services industry we are conducting our 13th (but not
unlucky) annual survey at a time of cautious growth across the
sector.

Last year's annual survey revealed a feeling of optimism
with 62% of respondents believing the UK economy to be either
stable or improved on the previous 12 months. During the past year
this optimism has borne fruit, although probably not as much as
everyone had hoped for, if not expected, but we will know more once
the results of this year's survey are received.

London's reputation as a major financial centre continued to
suffer from the fall out of the 'credit crunch', with New
York still representing the biggest threat. It will be interesting
to see if this sentiment is held, in light of the FSA's
intensive supervisory approach as well as time being a great
healer.

94% of respondents to last year's survey were expecting
turnover to remain stable or increase in the forthcoming 12 months,
and given the increased activity in the market this expectation is
likely to have materialised. Conversely, 44% of respondents to last
year's survey had experienced a decline in profit margins as
pricing pressures took hold. Will this trend continue?

Unsurprisingly, 2009 was the year of redundancies but our
respondents were not expecting this trend to continue in 2010 and
based on evidence in the market place, this hope will convert into
actual results in this year's survey.

Tax and regulatory changes were reported to have had an adverse
impact in last year's survey and this sentiment is expected to
continue in light of proposed changes, and consequently increased
costs, in both areas.

Are we in for another tough year as fears of a double-dip
recession circulate? We would like to hear your thoughts.

Our survey is a reliable source of information relevant to your
sector and highlights key areas affecting your market and business.
We would like to invite you to participate by completing the
enclosed survey questionnaire, and would be grateful if you could
return this to us by 9 December. All participants will receive a
full summary of our survey findings which we hope will provide a
useful benchmark of industry sentiment.

Individual responses are treated as confidential.

REVISING THE REMUNERATION CODE - HOW WILL THIS IMPACT YOUR
FIRM?

By Inez Anderson and Marco Bragazzi

The remuneration code is being revised; its remit will now
be extended to include a wider scope of firms and individuals. You
should review your remuneration policies to avoid being penalised
by the FSA for noncompliance.

From 1 January 2011, detailed new compliance requirements are
coming into effect for financial services firms in respect of their
remuneration policies; in particular, variable pay practices. As a
result of the proposed changes to the FSA's remuneration code,
which are still in consultation, companies may have to radically
alter their remuneration structures, in particular for high-level
variable pay arrangements for key staff. The changes were required
following the Financial Services Act 2010 and amendments to
remuneration in the Capital Requirements Directive 3.

Scope of the changes

The code will be extended to all CAD investment firms, not just
large banks, building societies and broker dealers. In all, over
2,500 authorised firms will be caught within the code's
scope.

There is now a much wider application to individuals within
these firms. The remit will now cover people who perform
significant influence functions for a firm; senior managers; or any
staff whose remuneration takes them into the same bracket as senior
management and risk takers and whose professional activities could
have a material impact on the firm's risk profile. This could
extend to staff working in areas such as compliance, internal
audit, IT and similar functions.

The new rules require that there be an appropriate ratio between
fixed and variable remuneration. It should be possible for the
individual not to receive any variable remuneration at all.

Bonuses

Where bonuses are paid, at least 40% of a bonus should be
deferred for at least three years, and if the amount concerned is
over £500,000, then at least 60% should be deferred. At least
50% of a bonus must be in shares, share-linked instruments or other
non-cash equivalent instruments of the firm. Guaranteed bonuses
will only be permitted for new joiners, and they will be limited so
that they are not more generous than arrangements already entered
into by the employee with his/her last employer.

An important aspect is that there should be a performance
adjustment both at the grant of the bonus and through its life to
adjust for risk. Employees whose total pay is less than
£500,000, with variable pay which does not exceed 33% of the
fixed pay, will be excluded from these general arrangements on the
basis of proportionality. This is an important concept for the FSA,
as it attempts to ensure that heavy regulation only applies to
high-risk category firms with a lighter touch applying to less
risky organisations.

Calculating risk

For remuneration policies to support effective risk management,
firms need to ensure that their techniques for assessing variable
remuneration take account of all risks. Historically, the FSA has
looked at how firms adjust for risks after the payout of bonuses,
'ex-post-risk adjustment', but it is now going to review
techniques used to calculate risks before bonuses are paid out,
'ex-ante risk adjustments'. This will be relevant for all
companies. The revised code includes detailed provisions concerning
pension benefits and the personal investment strategies of the
individual employees to ensure that they do not avoid the
rules.

How will the new rules be regulated?

Firms will see an increase in corporate governance; they will be
required to establish detailed arrangements to ensure that rules
are met, including establishing remuneration committees and policy.
There may also be potential for additional reporting to the FSA on
remuneration via GABRIEL.

The level of compliance required will vary, depending on the
perceived impact the firm could have in the eyes of the FSA. The
revised code defines three categories which firms would fall into:
high impact, medium high and medium low impact, and low impact.
High impact firms will be supervised on a close and continuous
basis with medium high and medium low firms being subject to ARROW
or ARROW liked reviews, while low impact firms will be covered via
the thematic review process.

Firms will be penalised if they fail to comply with the rules.
These penalties include disallowing a firm from remunerating its
staff in a specified way as well as providing for the recovery of
payments made where the remuneration is deemed to be void by the
code.

Time frame for implementation

The FSA is not expecting to publish the final revised
remuneration code until mid-December. It is expected that firms
which are already within the scope of the current remuneration code
will need to implement the revised code from 1 January 2011, in
respect of the 2010 bonus round. For other capital adequacy
directive investment firms now caught by the revised code, the FSA
is not expecting an implementation of the new remuneration
structures until later in 2011, particularly due to the delay in
publishing the final code. As a result transitional provisions will
be in place from 1 January, with full implementation required by 1
July 2011.

Next steps

It will now be an important compliance function for all code
firms to satisfy these rules. When the rules are finalised you
should seek advice. We can assist with this and can also help with
redesigning remuneration policies and appropriate structures. If
you would like advice on the tax risks associated with deferred
pay, or wish to find out more about tax planning to minimise tax
leakage for both employer and employee, please get in touch.

CHANGE AFOOT

By Colin Aylott

We review taxes which have been proposed for the financial
services sector following extensive G20 discussions.

Several new taxes are currently being considered with the aim of
ensuring that the financial sector makes a greater contribution to
public finances. The most relevant potential changes to the
financial services sector are the proposed bank levy, financial
activities tax, and financial transactions tax.

Bank levy

A levy on banks' balance sheets is due to come into force on
1 January 2011. This is being introduced along with similar levies
in Germany, France and the US (Hungary and Sweden have already
introduced a similar tax), though the scope and cost of the tax
is/will be different in each location. Dubbed a 'financial
stability contribution', the levy is intended to both create
tax revenue and discourage highrisk funding profiles.

The levy will apply to UK banks and building societies, and to
branches of foreign banks operating in the UK, where their relevant
short-term and long-term liabilities amount to £20bn or more.
The definition of bank is the same as that used for the much
maligned bank payroll tax so it can apply to certain financial
businesses that are not banks, though the size requirement will
exclude many of these businesses.

The rate of levy has still to be set, but if the June 2010
Budget proposals are accepted the initial levy will likely be set
at 0.04% of equity and liabilities for 2011, expected to rise to
0.07% for subsequent years. The June Budget also proposed reduced
rates for certain funding, starting at 0.02% for 2011 and rising to
0.035%. HMRC will collect the levy, which is not deductible for
corporation tax. There are complicated rules concerning what is
included as a liability.

The effect on individual institutions will vary, but the impact
of the levy will be partly offset by the proposed reduction in the
rate of corporation tax from 28% to 24% over the next few years.
Some analysts have suggested that some of the largest banks
operating in the UK will be better off under the 2011 taxation
regime, though this remains to be seen.

Although some other countries have introduced or committed to a
similar levy, concerns will remain about the competitiveness of the
UK within the global banking market. Most countries outside of the
EU have stated their intention not to impose similar charges.
Despite possible tax savings by banks from the corporation tax
reduction, the introduction of another tax charge may well be
damaging to the UK's reputation within the global banking
market. Financial activities tax In April, the International
Monetary Fund released a report to the G20 proposing a financial
activities tax (FAT) to be levied on the profits of financial
institutions and potentially from high remuneration levels.
Financial institutions are currently undefined although it is
expected that it would be widely drawn.

On 7 October the EU published a report supporting the
implementation of a FAT at EU-level. If introduced, it is argued
that revenues from the FAT could reach €25bn annually
across the EU, based on a tax rate of 5%. The report notes that the
FAT could offset the VAT exemption that financial services
institutions currently benefit from for certain transactions, since
the FAT effectively acts as a tax on value added.

Implementation of the FAT is not intended to directly alter the
structure of the markets where financial institutions operate,
since income would be taxed regardless of how it is generated.
Similarly, since the FAT applies to the profits and/or remuneration
from financial activities, the prices of specific financial
instruments are not intended to be directly affected and the market
structure not directly altered. A stated aim of the tax is to
discourage risky investment practices so it could be targeted more
at such transactions. If so, there may be indirect changes in the
market structure as financial institutions seek to minimise their
tax burden while still maximising revenue.

The European Commission has noted the probable ineffectiveness
of a FAT at a national level, due to the mobility of
multinationals. Indeed, the UK Government has stated that it is
unlikely to implement the FAT without international agreement.
Accordingly, without EU agreement the FAT looks unlikely to come
into practice. If it is implemented within the EU, it remains to be
seen if it will encourage businesses to move activities outside the
EU to avoid the tax.

Financial transactions tax

A financial transactions tax (FTT) would be a tax on the value
of individual transactions. If implemented it would most likely
apply to a wide range of transactions in order to raise the most
revenue. Much like the FAT, the FTT would need international
agreement so as not to encourage financial institutions to
relocate. It should be noted that the UK Government has not
indicated that it is in favour of such a tax so it is perhaps less
likely to be implemented than the other taxes.

While the bank levy is likely to come into effect as proposed,
implementation of the FAT and the FTT appear doubtful at this
stage. However, discussion surrounding them creates uncertainty
regarding the tax position for financial services businesses, which
may prove damaging to their respective positions within the global
financial market and encourage them to consider relocating.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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